Two of the most promising alternatives in the quest for higher efficiency in unitary heat pumps are ground-source heat pumps and variable-speed air-source heat pumps. A project has been undertaken to merge the two technologies to produce a very flexible and efficient heating, cooling, and water-heating system. Reports on the test results of the first two phases of development. The project began with the modification of a 10.6 kW (3-ton) variable speed air heat pump. The compressor, indoor fan, air coil and controls were retained. The outdoor coil was replaced with a coaxial water-to-refrigerant coil and a vented water-heating coil was added. Tests were performed and EERs ranged from 12.8 to 27.6 Bth/Wh (COP = 3.8 to 8.1) in cooling. Heating COPs ranged from 3.1 to 6.0. Further modifications were made to enhance capacity, efficiency, and water-heating capability. These included enhanced thermostatic expansion valves and variable-speed pumping controls. Tests are being conducted on the second stage unit. Both pumps equipped with variable- speed controllers are performing well. New controller hardware for the compressor, fan, and pumps have been assembled, and the first control logic program has been successfully tested.KEYWORDS: soil heat pumps, heat pumps, air heat pumps, designing, air conditioning, water heat pumps, controls, speed, cooling.